How Does Uncertainty Affect Venture Capital Investment? Evidence from Inevitable Disclosure

Abstract

This study investigates how regulation on inevitable disclosure, which is a form of intellectual property rights (IPR) protection, affects venture capital investment. Inevitable disclosure regulation establishes whether the owner of a trade secret can (if the regulation is in favor of the inevitable disclosure doctrine) or cannot (if the regulation is against the inevitable disclosure doctrine) obtain an injunction to prohibit a person from working for a competitor, on the grounds that she would inevitably disclose trade secrets. Hence, inevitable disclosure regulation might solve two types of uncertainty about IPR protection – regulatory and behavioral uncertainty – either of which might prevent venture capitalists from investing in a state. Using a sample of 87,524 venture capital deals across all 50 states and the District of Columbia in the United States, we find that (1) having a clear regulation on inevitable disclosure increases venture capital inflows more than not having a clear regulation, (2) a regulation favorable to inevitable disclosure increases venture capital investment more than a regulation against inevitable disclosure, and (3) a regulation favorable to inevitable disclosure increases the proportion of non-local venture capital investment more than a regulation against inevitable disclosure.